Thursday, October 8, 2009

Penny Wise on Dim-Post on Roger Douglas

To celebrate the return of my internet connection – rural wireless broadband is a lovely idea, and sometimes it even works – here is a guest post by Penny Wise, an economist who has seen a thing or two in her time. Specifically, in this case, what happened in the 1980s at Treasury and with the Roger Douglas reforms.

Dim-Post wrote a few days ago about Revolution, the four-part documentary about the reforms of the 80s, which he rates as “excellent”. Then he muses:

I wonder to what extent Douglas was the architect of Rogernomics. Before the 1980s he was a standard Labour style socialist, in the 90s and beyond he’s a crackpot. It’s only during his tenure as Finance Minister there is an intellectual framework and ideological coherence to his policies. But during the documentary in both the interviews and archival footage he only speaks about economic issues in very broad terms – the need for change, the need for it to be ‘bold and radical’ and the need for extraordinary speed. I suspect the real architects were his advisors from Treasury and the Reserve Bank (many of whom began the 80s as civil servants and ended the decade as multi-millionaires running the companies they helped Douglas privatise).

I thought Penny would have a view on this, and you know what? She does. Here she goes:

So Dimpost reckons it was the advisors in the Treasury and the Reserve Bank who provided the intellectual framework for the Douglas reforms. Well yes, of course, that’s their job, it is bread and butter to them.

But what they were recommending – all conveniently summarised in Economic Management, the published advice to the incoming government in 1984 – was all pretty much bog-standard economic advice, the sort proffered to western governments around the world by their economic advisors, and by the OECD. That orthodoxy may have come as a shock to those of us living in the sheltered and decrepit economy that was NZ by the early 1980s, but more fool us. Now that we have seen similar things – indeed, much more radical reforms – all around the world, looking back it all seems rather timid and not at all novel. Compare NZ’s reforms with the adoption of flat-tax systems in some of the former Soviet bloc countries, the education voucher system of Sweden, the privatisations pretty much everywhere.

What was needed in NZ was a politician brave enough to start doing what had to be done. I believe it is called leadership.

It could have been done much better, but all politicians are massively constrained by the practice of politics and the limits of what their particular parties can do, given the constituencies they represent. So Labour was able to rip out farm subsidies whereas National could not; and National later was able to bring some much-needed labour market reform (which if it had come earlier would have saved many jobs) but Labour could not.

Essentially, Douglas stands accused of being a politician, not a policy wonk. Well, guilty of course. And proudly so, I imagine.

The focus in the Revolution series on the sharemarket crash – which was an international phenomenon – is a distraction from the main point, which was the necessary restructuring of the economy, the need to get fiscal balance (same fiscal problem today) and the need to get inflation under control. All these were huge tasks, and inevitably took many years to achieve.

As for all the civil servants who are supposed to have gone off and become multi-millionaires running companies they helped Douglas privatise, oh the shame of it. I suppose he is thinking of Rod Deane, but in fact most of the public servants who moved went into other businesses, finance in particular as that was the best fit for the skill set that most had. Many did quite well, and some who went overseas did extremely well. All that shows is that many of them were talented people, with highly marketable skills, and that a more liberal economy offered more opportunities than working hard in the bureaucracy for little reward.